Okta, Inc. IPO: What Investors Need to Know

Investors interested in technology have had a nice surprise this year -- initial public offerings. As the trough of 2016 moves further into memory, companies such as Snap and MuleSoft have made their market debuts. On April 7, another tech unicorn went public: Okta, Inc (NASDAQ: OKTA).

Continue Reading Below

The company sold 11 million shares at $17, above the projected range of $13-15, for a market cap of 1.52 billion.The stock shot up to $23 when the market opened, and today trades above $24 -- almost double the initial projected range.

While I'm wary of buying a stock immediately after it goes public (see: Facebook), I believe investors looking for disruptive growth should become familiar with companies early in their public life, as tech investments can often lead to big future gains (see also: Facebook).

What is Okta?

Advertisement

Okta was founded in 2009 to help companies to secure their businesses as corporate infrastructures increasingly move toward software, cloud, and mobile environments.

Okta's product is the Okta Identity Cloud. It allows organizations to secure company interactions even as they become more decentralized; Okta describes this phenomenon as the "dissolving of the corporate firewall." While moving from hardware-based, on-premises infrastructures to cloud, software, and mobile-based infrastructures allows companies to drive costs down and increase flexibility, it also presents security risks.

Okta solves that problem, allowing companies to secure interactions with employees, customers, and suppliers, wherever they are, in a simple, intuitive interface, without being locked in to a single application vendor. Okta's identification-as-a-service (IDaaS) is fully integrated with over 5,000 cloud, mobile, and web applications.

The company's founders, CEO Todd McKinnon and COO Freddy Kerrest, were former Salesforce.com (NYSE: CRM) employees. The company was also the first cloud investment by venture capital firm Andreessen Horowitz.

Who are its customers?

Okta's S-1 filing boasts of over 3,100 customers in 185 countries. High-profile customers include Twenty-First Century Fox, Microsoft's(NASDAQ: MSFT) LinkedIn, MGM Resorts, and Twilio; Okta also integrates with all the leading cloud and enterprise software vendors. The company serves businesses of all sizes, however. Okta has offices in the U.S., Canada, the U.K., the Netherlands, and Australia.

How big is its market?

Okta believes its market is "at least $18 billion." This is far larger than its current revenue, which totaled $111.5 million for the nine months ended Oct. 31, 2016. Thecompany's growth rate for the nine months ended Oct. 31 was 90%, is impressive, and non-GAAP (generally accepted accounting principles) gross margin increased from 58% to 66%.

Still, the company remains unprofitable, as it's aggressively reinvesting in sales and technology. Net loss for the nine-month period was $65.2 million, bigger than 2015's $54.9 million loss. This is due to a doubling of research and development costs, and a 140% increase in sales and marketing expenses in the year-over-year period.

Does it have competitive advantages?

Okta touts three competitive advantages: product, ecosystem, and data network effects. For product, the company believes that as it integrates with more applications, and these applications are available to all users, Okta's platform will attain greater value. For ecosystem advantages, the company points to the number of system integrators and software vendors that have built ecosystems around Okta's security products. For data, the company notes that it collects vast amounts of information about how and where users access applications, and where security attacks originate; Okta says these proprietary insights drive future product innovation.

Okta is the only company to be named a leader in Gartner's Magic Quadrant IDaaS category in all three years it has existed. Dollar-based retention was also strong, at 124% for the nine months ended Oct. 31, 2016.

The combination of network effects and switching costs seems powerful, but I'm unsure exactly how resilient these advantages are. Business Insider notes that Salesforce launched a rival product called Salesforce Identity, and that CEO Marc Benioff seems to have a contentious relationship with Okta's founders. Microsoft, meanwhile, is both a customer and a competitor. A Techcrunch article asks: What if Microsoft develops its own solution, and then pulls the ubiquitous Office 365 from Okta's platform? Moreover, Okta's S-1 states that more large tech companies have made acquisitions in authentication and security products.

That being said, Okta was built from the ground up for the cloud, and is not tied to a "bundle" of other offerings, so it may be attractive for customers looking to avoid getting tied down to a single large vendor.

Investor takeaway

Today's valuation at almost $2.7 billion is roughly 15-18 times sales; that's way too expensive for me. While there is no doubt that cloud computing and cybersecurity are secular growth trends, I'm sitting on the sidelines for Okta, though watching the cloud security race with interest.

10 stocks we like better than Okta, Inc.When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now and Okta, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors; LinkedIn is owned by Microsoft. Billy Duberstein owns shares of Facebook and Microsoft. The Motley Fool owns shares of and recommends Facebook and Gartner. The Motley Fool recommends Salesforce.com and Twilio. The Motley Fool has a disclosure policy.